Crypto Winter or Crypto Ice Age
Looking back at 2022's biggest crypto stories, they are dominated by crashes, contagion and collapses which make investors question the future of crypto. Crypto market capitalization was $2.3tn at the peak of January 2022, since then, prices have fallen by more than half and the market cap now stands at $805bn, a 65% fall.
The thunderstorm of the de-pegging of Terra's UST token and the subsequent series of liquidity squeezes and bankruptcy filings of high-profile companies, like Celsius and 3AC, have shaken investors' risk appetite. Followed by the collapse of FTX cryptocurrency exchange, the $9 billion loss of client deposits and the arrest of its founder, Sam Bankman-Fried, once nicknamed the "King of Crypto", will shape the crypto landscape for years to come.
Despite the above fallout, there are important factors that distinguish this market from the previous crypto winter. Firstly, the current crypto winter is largely the combination of aggressive tightening from the Fed in an effort to tame rocketing inflation and the above idiosyncratic crypto risk. Secondly, institutional crypto adoption remains high as many investors taken advantage of the crypto massacre to snap up platforms and assets at a discount while taking a long-term perspective and recognizing the cyclical nature of the market.
Nevertheless, there are some determining factors that would define whether this is a Crypto Ice Age or Crypto Winter:
- Regulatory clarity will shape the next market cycle. Policy makers recognize that the problems faced this year were driven by human behavior, not any unique aspect of crypto or blockchain technology. Authorities will cooperate and coordinate with each other, domestically and internationally to overcome the structural vulnerabilities and encourage increasing interconnectedness with the traditional financial system. This element will be a critical factor to improve and strengthen trust in the ecosystem as well as drive retail and institutional adoption further
- Fed policy on interest rate is a “matter for all markets” and a similar pace of higher rates along with recession fears will continue to put pressure on the markets and this uncertainty itself drives volatility in the markets for longer
- We might see more bleeding from “second order effects” arising from the unraveling of FTX. FTX and Alameda played a leading/rescue role, especially during this bear market, and have been involved in numerous projects (more than 100), therefore, no one knows which one holds the next grenade
The new regime of greater macro and market volatility along with inflation above pre-pandemic levels laid out that investors don’t have to go far up the risk spectrum to receive yield. Higher yields on low-risk assets are a gift to investors who have long been starved for income. Bottom line of this new regime is crushing demand for high-risk assets.
Even with the corruptive forces that brought the troubles in 2022, crypto and its underlying blockchain technology is clearly here to stay. There are number of opportunities that could improve crypto adoption, ranging from a wider adoption of stablecoins by regulated institutions, countries taking significant steps towards piloting Central Banks Digital Currencies, rumors that Twitter will become a “Killer App” that would allow crypto payments, the first spot Bitcoin ETF could get approved and finally the Bitcoin “halving”. Now is the time to look at which themes 2023 could have in store:
- New CeFi-DeFi hybrid exchanges to experiment with exchange architecture to mitigate inherent risks of a consolidated stack of custody, clearing, and liquidity. Mainly, the actions of these 2022 bad actors come down to issues of trust and transparency, which DeFi has handled well, given the on-chain properties.
- Tokenisation of illiquid assets such as private equity and real estate. The emergence of this category has the potential to unlock a huge amount of liquidity as underlying assets are represented on-chain in an accessible manner. Tokenisation is definitely one of the new frontiers, as fund managers can convert private equity or real estate assets into digital transferable securities that will allow liquidity to improve or even diminish the barriers of entry for qualified investors.
In the aftermath of high profile bankruptcies and hacks in the industry in 2022, digital asset evolution and the core thesis of blockchain disruptive capabilities will remain intact, whether it is a Crypto Winter or a Crypto Ice Age. Meanwhile’ subjects like tokenisation, permissioned DeFi and web3 tooling will remain at the centre of institutional investor allocation. Despite the current turmoil, the founding mission of the crypto industry is to rebuild trust and transparency among participants and eventual recovery from the 2022 disappointments.